U.S. President Donald Trump speaks to members of the media before boarding Marine One on the South Lawn of the White House in Washington, D.C., U.S.,  (Photographer: Andrew Harrer/Bloomberg)

Trump Must Weigh Retaliation Risk in Deciding Tariffs on Steel

(Bloomberg) -- The U.S. sounds confident that proposed tariffs on steel and aluminum won’t break global trade rules, despite warnings from other countries that such a move could trigger a flurry of retaliation. It’s up to the president to decide if that’s a risk he’s willing to take.

The Commerce Department on Friday laid out a range of options for President Donald Trump to consider, including a tariff of at least 24 percent on steel imports from all countries. In announcing the long-awaited proposals, Commerce Secretary Wilbur Ross acknowledged other nations may respond in kind.

Trump Must Weigh Retaliation Risk in Deciding Tariffs on Steel

“We believe, and our counsel believe, that this is a perfectly valid interpretation of national security,” Ross told reporters on a conference call. “As to whether there will be a challenge, it wouldn’t surprise us if there were. Anytime you do something that affects a number of countries, the likelihood is that they will bring a WTO action or take other measures.”

China said the U.S. already has excessive protections on domestic iron and steel products and that it reserves the right to retaliate. “If the final decision impacts China’s interests, China will certainly take necessary measures to protect its own rights,” Wang Hejun, chief of the trade remedy and investigation bureau at China’s Ministry of Commerce, said in a statement on its website.

Japan, India

An official of Japan’s Kobe Steel Ltd. warned it would be difficult for the industry not to be impacted by such tariffs. India’s steel industry, which vies with Japan as the world’s No. 2 after China, probably won’t be hurt, according to K. K. Pahuja, president of the Indian Stainless Steel Development Association, in a report in the Business Standard. 

The question is whether Trump is willing to court more trade conflict at a time when doubts are being raised about the longevity of the U.S. economic recovery. Assets such as stocks plunged this month as investors weighed whether the American economy may be overheating. Trump has complained repeatedly about what he sees as the unfair trading practices of countries such as China. But he has also touted the American economy’s strong performance of late, and he loves to boast about the stock market when it rises.

Trade War

Some analysts are already predicting a backlash. Any of the options presented to Trump on steel would have a more significant and broader impact than expected, BMO Capital Markets analyst David Gagliano said in a note titled “The steel and aluminum trade war begins.”

American steel companies and steelworker unions have been pushing for Trump to follow through on his promise to protect the industry. Senator Chuck Schumer, the top Democrat in the upper chamber, said he hoped the recommendations “are the beginning of efforts by this administration to finally get tough on China.”

Sweeping tariffs may not solve the problem of excess capacity in China, the world’s biggest steel producer. The U.S. and European Union have complained for years that Chinese steel producers unfairly benefit from state subsidies, and dump their products on the world at below-market prices.

But China only accounts for about 1 percent of U.S. steel imports. Its steel exports overall shrank to the lowest in almost five years in January as strong domestic growth mops up production and environmental curbs trim capacity.

Clumsy Tool

“It’s a clumsy instrument for dealing with this problem, and it won’t change China’s behavior,” said Christine McDaniel, senior research fellow at Mercatus Center at George Mason University in Virginia. The U.S. imposed tariffs on steel early last decade, but wasn’t able to convince China to change its state-driven economic model, said McDaniel, who served as a senior trade economist in the White House Council of Economic Advisers.

“This is a pretty expansive use of national security which will inspire two things: one, retaliation, and two, it’s kind of a passport for other countries to emulate,” said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics in Washington.

In addition to tariffs of their own, countries such as China could challenge U.S. action at the World Trade Organization, a process that could take years.

The president last year ordered Commerce to probe whether imports of steel and aluminum imperil U.S. national security. In doing so, he invoked seldom-used Section 232 of the 1962 Trade Act, which allows the president to impose tariffs without congressional approval.

Trump has until April 11 to decide on any action on steel and April 19 for aluminum. He’s facing pressure from lawmakers in his own party, some of whom gave him an earful this week on the potential fallout. The president also risks alienating industries that either rely on steel and aluminum as inputs, or are worried about retaliation. A group called Farmers for Free Trade warned on Friday that U.S. agricultural products such as chickens and sorghum could be first in the line of fire.

Surgical Approach

Rather than tariffs on all imports, Trump may opt for a more “surgical” approach, as Ross suggested at a meeting with lawmakers from both parties this week. On steel, for example, the president could go with the recommended option that would levy a tariff of 53 percent on imports from 12 countries. The list includes China, Russia, India and South Korea, but allow exemptions for allies such as Japan, Germany and Canada.

Canada is not only the top exporter of steel to the U.S., it buys more American steel than any other nation, Adam Austen, the spokesman for Foreign Affairs Minister Chrystia Freeland said in emailed statement. The Canadian government will continue stressing the importance of that trading relationship as it awaits the final outcome from Trump, said Austen.

The release of the Commerce recommendations isn’t the “end game,” Evercore ISI senior political strategist Terry Haines said in a note. “Today is about showing the administration’s seriousness about acting on trade and protecting a U.S. capability in steel and aluminum for national security purposes, and also to get reaction both inside and outside the U.S. so that Trump’s final decision can be more precisely calibrated,” said Haines.

©2018 Bloomberg L.P.